Is the COVID-19 pandemic a consumption game changer?

Research co-authored by Alex Hodbod ’12 (ITFD) and Steffi Huber ’10 (Economics)

The CEPR journal on Covid Economics recently included the paper, “Is COVID-19 a consumption game changer? Evidence from a large-scale multi-country survey” by Alexander Hodbod ’12 (ITFD), Cars Hommes, Stefanie J. Huber ’10 (Economics), and Isabelle Salle.

Steffi gave an interview to CEPR’s Tim Phillips about the team’s research:

Policies to avoid zombification of the economy

In an accompanying VoxEU column, the authors discuss the risks that government responses to COVID-19 could “zombify” the economy.

“A representative consumer survey in five EU countries indicates that many consumers do not miss certain goods and services they have cut down on since the COVID-19 outbreak,” the authors explain in their column. “Fiscal policy must recognise that some firms will become obsolete in the altered post-COVID-19 environment. To achieve a swift recovery, these obsolete firms must be allowed to fail fast so that resources can be reallocated to more efficient uses. Instead, fiscal support should be laser-like in targeting those households who are particularly hard hit by the crisis. Such support should be oriented towards helping displaced workers retrain and find new jobs.”

Paper abstract and download

Prospective economic developments depend on the behavior of consumer
spending. A key question is whether private expenditures recover once
social distancing restrictions are lifted or whether the COVID-19 crisis
has a sustained impact on consumer confidence, preferences, and, hence,
spending. Changes in consumer behavior may not be temporary, as they
may reflect long-term changes in attitudes arising from the COVID-19
experience. This paper uses data from a representative consumer survey
in five European countries conducted in summer 2020, after the release
of the first wave’s lockdown restrictions. We document the underlying
reasons for households’ reduction in consumption in five key sectors:
tourism, hospitality, services, retail, and public transports. We identify
a large confidence shock in the Southern European countries and a
permanent shift in consumer preferences in the Northern European
countries. Our results suggest that horizontal fiscal support to all firms
risks creating zombie firms and would hinder necessary structural
changes to the economy.

Connect with the authors

  • Alexander Hodbod ’12 (International Trade, Finance, and Development). Counsellor to ECB Representative to the Supervisory Board, European Central Bank (DGSGO-SO), Frankfurt, Germany.
  • Cars Hommes. Professor of Economic Dynamics at CeNDEF, Amsterdam School of Economics, University of Amsterdam, and research fellow of the Tinbergen Institute, Amsterdam, The Netherlands, Senior Research Director (Financial Markets Department), Bank of Canada.
  • Stefanie J. Huber ’10 (Economics). Assistant Professor at CeNDEF, Amsterdam School of Economics, University of Amsterdam, and research candidate fellow of the Tinbergen Institute, Amsterdam, The Netherlands. 
  • Isabelle Salle. Principal Researcher at the Bank of Canada (Financial Markets Department), research fellow at the Amsterdam School of Economics, University of Amsterdam, and research fellow of the Tinbergen Institute, Amsterdam, The Netherlands. 

Institutional real estate investors, leverage, and macroprudential regulation

VoxEU article by Manuel A. Muñoz ’13 (Macroeconomic Policy and Financial Markets)

I am honoured to share my new VoxEU article (with you), which I believe it’s relevant for the ongoing debate on how to strengthen the macroprudential regulatory framework for nonbanks:

Ensuring that institutional real estate investors are subject to countercyclical leverage limits would be particularly effective in smoothing the housing price and the credit cycle.


In addition, the associated ECB working paper suggests that this type of regulation would allow for rental housing prices to increase less abruptly during the boom, an issue that policymakers in several countries of the euro area have attempted to handle via price regulation (an alternative that could generate price distortions).

Also on VoxEU by Manuel A. Muñoz

Macroprudential policy and COVID-19: Restrict dividend distributions to significantly improve the effectiveness of the countercyclical capital buffer release (July 2020)

Connect with the author

alumni

Manuel A. Muñoz ’13 is Senior Lead Expert at the European Central Bank. He is an alum of the Barcelona GSE Master’s in Macroeconomic Policy and Financial Markets.

Are you a Barcelona GSE alum with a new paper or project to share? Learn how to submit your work to the Voice!

Democratic tipping points

VoxEU article by Adilzhan Ismailov ’15 (Economics) and Professor Antonio Ciccone

CEPR’s policy portal VoxEU has published the article “Democratic tipping points” by Economics alum Adilzhan Ismailov ’15 and Antonio Ciccone, professor at the Barcelona GSE and the UPF Economics department, where Adilzhan is currently doing his PhD.

VoxEU promotes “research-based policy analysis and commentary by leading economists.” The site receives about a half million page views per month.

Article summary

Persistence of democratisation following transitory economic shocks plays an important role in the theory of political institutions. This column tests the theory of democratic tipping points using rainfall shocks in the world’s most agricultural countries since 1946. Negative rainfall shocks have a strong and transitory effect on agricultural output, but a persistent positive effect on the probability of democratisation even after ten years.

Key conclusions

The recent history of democratic (non-)transitions in the world’s most agricultural countries indicates that transitory events can have enduring effects on democratic institutions. When lower rainfall led to below-average agricultural output in these countries, countries ruled by authoritarian regimes were more likely to democratise and more likely to be democratic ten years later.

The shape of the effect of rainfall on the probability of democratisation indicates that the effect is through agricultural output. The agricultural economics literature finds an inverted-U-shaped effect of rainfall on agricultural output. In the theory of Acemoglu and Robinson (2001, 2006) we build on, transitorily lower output raises the probability of democratisation, and transitorily higher output lowers the probability of democratisation. Hence, the inverted-U-shaped effect of rainfall on agricultural output should translate into a U-shaped effect of rainfall on the probability of democratisation. We find this to be the case. Moreover, our results indicate that rainfall shocks tend to produce the largest change in the probability of democratisation when the estimated effect of rainfall on agricultural output is largest.

Figure. Effect of rainfall on real agricultural output and on the probability of democratisation

Note: The inverted-U-shaped solid black line is the effect of rainfall in year t on real agricultural output in year t and is measured on the left axis. The U-shaped coloured lines are the effect of rainfall on the probability of democratisation between years t-1 and t (one year later). The three classifications of democratic and autocratic regimes used in the figure are those of Acemoglu et al. (2019) (blue solid line); Przeworski et al. (2000) (red dotted line), as updated by Cheibub et al. (2010) and Bjornskov and Rode (2020); and Geddes et al. (2014) (green dashed line). The effect of rainfall on the probability of democratisation is calculated using the effect of rainfall in year t in column (1) of Tables 2 and 3 in the paper respectively for the Acemoglu et al. and the Przeworski et al. democratisation indicator. For the Geddes et al. democratisation indicator, the effect of rainfall on the probability of democratisation is calculated using the effect of rainfall in year t-1 in column (5) of Table 3. This is because of Geddes et al.’s unconventional start date for democratic regime transitions; see page 16 for details. Real agricultural output is an index with the base period 2004-2006. Rainfall is measured in dm.

portrait

Adilzhan Ismailov ’15 is a PhD candidate at GPEFM (UPF and Barcelona GSE). He is an alum of the Barcelona GSE Master’s in Economics.